Return on Investment, or Paying to Hide Out?

I heard an interesting story on NPR the other day, about investors who are so frightened of financial markets that they are willing to pay – and get no return – just to keep their money safe. Even with rates so low on US Treasury bonds (about 1.5% for 10 years!) investors from around the world continue to buy.  At first it seems puzzling, and here’s why: it’s anybody’s guess what inflation will be over the next ten years, but if you expect inflation to average 1.5%, then the inflation adjusted return for those US Treasury bonds would be exactly zero. It’s not a stretch to imagine inflation of 1.8%, meaning investors in the 10-year treasury would lose an average of .3% to inflation every year.

So: why? That one-word question can be answered with one word: fear. Fear of Europe, fear of banks, fear of corporate malfeasance.  Some investors seem afraid of nearly everything; the equivalent of a monster in the financial closet. I’ll admit, it can seem scary out there. Greece is on the brink, Spain seems close behind, China’s economy is slowing. Here at home you still have big banks doing stupid things. So what’s an investor to do? For many, the answer is to hide in US Treasury bonds, despite what seems like a near-certain inflation adjusted loss.

But think: as I’ve said before and will say again, you seldom make money following the herd.  Even if the herd is crowding into Treasuries.  What can you do? How about this: do you think that Procter & Gamble is on its way out of business any time soon? How about Exxon? Hershey?  I think those companies will be around for quite a while, and the shares of each one pay a cash dividend greater than the 10-year US Treasury.  Does that mean you ought to go out and buy their stock? No. But it means you should think about where the opportunities are for real safety – the safety that comes from confidence in your investments. For me, confidence doesn’t come in the form of government insurance or following the herd. Confidence comes in sound management and solid business. Opportunities exist.  Look for them, or ask your financial advisor what opportunities are right for you.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Political Risk: United States

As investors, we usually think of political risk relative to international investing – e.g. will Brazil honor contracts or will China steal our technology?  But there are more dimensions to political risk these days. 

Today, House Republicans released their 2013 budget.  Now, I don’t know what Vegas would say, but I’m confident that the chances of the budget becoming law are akin to flying pigs.  However, this budget proposal does remind me of the political battle that is likely to take place later on this year. 

If you think the gridlock over the payroll tax extension was frustrating, just wait until the much larger Bush tax cuts are about to expire again.  If you thought the Joint Select Committee on Deficit Reduction’s results were embarrassing, just wait until the harsh medicine of its failure is on our doorstep.  If you thought these debates were poisonous and only resulted in kicking the can down the road, just wait until we do it all again, all at once, during a Presidential election year.

In August of 2011 Standard & Poor’s downgraded the U.S. credit rating not because our national credit card was maxed out quite yet, but rather because of S&P’s lack of faith in our policymaker’s ability to constructively work together to find solutions for our long-term debt trajectory.   Whether or not that credit rating mattered is up for debate, but it’s hard to disagree with S&P’s conclusions about Congress. 

We could, and should, be leaders in the world with regard to fiscal responsibility in government, but that is unlikely with our current crop of representatives.  Now that the congressional pipeline is full of critical and controversial fiscal matters, it’s advisable to consider the political risk in our own country – something we’re neither used to nor likely to be happy about doing.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).